Electricity access: time for smarter subsidy

Access to reliable, affordable electricity is a public service and worldwide has always been supported by state funds. But over the past decade, in the absence of government awareness or support of decentralized renewable energy (DRE) solutions in Africa and South Asia, innovative private sector companies and civil society organizations have built a market largely on their own, using creative financing, innovative business models and start-up grit to bring power to the 1 billion without it. As a result of their pioneering efforts, the sector is now stronger than ever, with DRE expected to reach at least 99 million households by 2020. But for electricity poverty to be eradicated by 2030, it is now time for public subsidies to catch up with the global consumer-led transition centered around distributed generation and storage, and give DRE equal footing in our energy future.

Subsidy reform is needed that levelizes treatment of centralized and decentralized grid solutions as well as renewable and fossil fuel (kerosene and diesel) solutions. Reform must also promote public-private partnership (PPP) that applies the best, integrated solution for the right context.

As we outline in this newsletter, the case is compelling for subsidy reform. Briefly:

At current rates, according to a new IEA report, 674 million people will still lack electricity access by 2030. Clearly business as usual approaches are not working. IEA says the overwhelming majority of the $28 billion annual investment needed to achieve universal access within 13 years should go to DRE, while the least-cost option for three-quarters of new connections needed is mini-grids or standalone systems.

Yet an analysis by the World Bank shows that subsidies to Sub-Saharan African utilities account for 1.5% of national GDP on average, while just 2 of 39 utilities are able to cover both capital and operating costs . Moreover, there is no correlation between quasi-fiscal deficit (i.e. utility subsidy) and improved energy access, economic development or reduced poverty.

In India, meanwhile, new data shows that subsidies for DRE solutions make up an annual average of a mere $98.3 million (less than 1% of total energy subsidies). Most subsidies take the form of foregone government revenue and in particular they support fossil fuels and power transmission & distribution, primarily as price support for artificially low consumer tariffs and for electricity sector bailouts. (For full details and comprehensive data on all fossil fuel and renewable energy subsidies in India, see IISD’s “India's Energy Transition: Mapping Subsidies to Fossil Fuels and Renewable Energy", available from 1 December)

If governments are going to invest precious financial resources in building an energy system of the future, a level playing field is needed that is solution agnostic, and delivers the biggest socio-economic bang for the buck as quickly as possible (for more on that, see our new report with SEforALL: ”Why Wait? Seizing the Energy Access Dividend”, a new framework that shows clear impact of getting access sooner from DRE instead of waiting on traditional solutions).

"We're not seeking new subsidies, but to benefit from subsidies that public utilities already benefit from,” said Sam Slaughter, the CEO of leading mini-grid developer PowerGen. “We want to convince large donors and the governments they support that it is in their interest to subsidize not only the public utilities, which they currently do to a pretty extreme degree, but make that funding similarly available to private utilities to create a more multi-polar power landscape."

SDG target 12c calls to “rationalize inefficient fossil fuel subsidies that encourage wasteful consumption by removing market distortions... in a manner that protects the poor and the affected communities.”

Until that happens, commercial capital will continue to sit on the sidelines when it comes to DRE. Smarter and integrated subsidy frameworks will help mobilize that private finance by sending a clear signal from regulators that they welcome partnerships that leverage private sector innovation, customer-centric business models and operational efficiency.

A strong case can also be made for reallocating fossil fuel subsidies (in particular for kerosene and diesel) to DRE. Power for All partner IISD recently did an analysis in India, finding that savings worth billions of dollars from kerosene subsidy cuts by the central government could go to accelerating the deployment of distributed solar. Given a net cost savings of switching from kerosene to solar, it said, a share of kerosene subsidy savings should be allocated to solar solutions as a first-best response to meet household energy needs.

In Nigeria, kerosene subsidies amount to more than the entire government expenditure on security, critical infrastructure, human capital development, plus land and food security combined, according a 2017 study by Lawrence Berkeley Labs researcher Evan Mills, who estimates total annual national kerosene subsidy expenditure in 2016 of $1.5 billion. Despite this level of spending, the poorest quintile of Nigerian households only receives 13% of total kerosene subsidy, while tens of millions still lack electricity access.

Implementing subsidy reform is only a first step. In some countries like India, where there is already a 30% capital expenditure subsidy in place for mini-grids, for example, private developers have had to wait many months to be paid, or in some cases have never received payment at all, according to practitioners. Enforcement of subsidy regimes is also critical.

Lastly (and perhaps most importantly), in order for subsidy reform to happen, the current political economy that exists within national governments and between those governments and their utilities and donors requires fundamental reform. The current system incentivizes good money to follow bad, and until that changes and greater state support is allocated to distributed approaches, SDG7 remains in grave jeopardy.